Lean, mean … and solvent

“Employing the lean logistics business model to reduce risk and drive ROI [return on investment] remains very popular even as the global economy revives.” –Simon Clark, business development manager–United Kingdom for software provider CargoWise

The above quote from Simon Clark (at right) – who’s been quoted in this space before – is but a polite way of saying that the pressure on supply chains to keep delivering bottom line savings for business isn’t going away, even though the global economy continues to improve (albeit slowly).

“While logistics service providers (LSPs) began to execute leaner logistics strategies during the economic downturn, that strategy is now being utilized more than ever in the logistics industry,” Clark, business development manager–United Kingdom for software provider CargoWise, noted recently. “LSPs are looking for ways to provide customers more efficient supply chain solutions by capitalizing on existing resources and minimizing waste to reduce future expenses.”

He stressed that strategic business operations are tightly integrated with lean manufacturing processes, incorporating the principles of storing fewer materials, which are handled less and delivered on a just-in-time basis.

[For different look at the demands placed upon logistics these days, take a look at what goes on behind the scenes on the Formula 1 racing circuit in Europe.]

This integrated supply chain practice is popular with LSPs as it provides a total view of overall waste for a company, Clark pointed out. For example, the inbound logistics process may be cost effective when serving a cost efficient manufacturing process; but if the outbound logistics process isn’t equally efficient and inventory of finished product is stored for unnecessarily long periods, the cost of this outbound delay may outweigh the benefits attained in the inbound process.

“Ultimately, while the lean operating model does provide some requirements for business monitoring such as Key Performance Indicators (KPIs) and other significant benchmarking metrics, visibility of information through all supply chain operating functions is really the key issue for LSPs in today’s global market,” he explained.

“Recently, with margins in supply chain execution tightened to new levels, the need to incorporate lean logistics practices into the movement of materials and products is driving many LSPs to embrace enhanced lean logistics techniques,” Clark said. “This ensures they have a profitable business which meets the demands of their clients and is sustainable for many years to come.”

But today, there’s an extra twist being added to the demand for “lean and mean” logistics services: proof of financial solvency. It’s no surprise to anyone in the transportation and logistics worlds that many supply chain service providers took pummeling blows during the global economic downturn of the past few years, with some of the blows potentially fatal ones in the business viability sense.

According to a new report issued by Oliver Wyman, in collaboration with the Association for Financial Professionals (AFP) dubbed The New Weakest Link in Your Supply Chain: Supplier Credit, businesses are being warned that they can no longer rely solely on credit ratings from credit rating agencies to evaluate the financial vulnerabilities of their supply chain suppliers.

“Companies need to develop their own capability to monitor the variables that could cause their key suppliers to default,” noted Hans-Kristian Bryn, a partner in Oliver Wyman's corporate risk consulting practice and a co-author of the report.

“By rationalizing their supply chains during the recession, many companies have inadvertently become more reliant on fewer suppliers at exactly the moment when their own finances have become shaky,” added Michael Denton, another Oliver Wyman partner and report co-author.

“CFOs and treasurers should pay as much attention to evaluating the probability of supplier default as they do to potential disruptions in their suppliers’ operations,” he stressed. “Also, suppliers are not rated by credit rating agencies if they are located in lower-cost countries where financial data is often less available and unreliable.”

Good stuff to keep in mind as the global economy continues to stumble towards a recovery of some sort.